Political institutions and income (re-)distribution: evidence from developed economies

Abstract

We discuss the effect of formal political institutions (electoral systems, fiscal decentralization, presidential and parliamentary regimes) on the extent and direction of income (re-)distribution. Empirical evidence is presented for a large sample of 70 economies and a panel of 13 OECD countries between 1981 and 1998. The evidence indicates that presidential regimes are associated with a less equal distribution of disposable incomes, while electoral systems have no significant effects. Fiscal competition is associated with less income redistribution and a less equal distribution of disposable incomes, but also with a more equal primary income distribution. Our evidence also is in line with earlier empirical contributions that find a positive relationship between trade openness and equality in primary and disposable incomes, as well as the overall redistributive effort.

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Acknowledgements

A previous, less focused version of this paper has been circulated under the title “Still a Director’s Law? On the Political Economy of Income Redistribution”. We thank the Institut de Recherche Européenne en Economie et Fiscalité (IREF) for funding this research. The paper has been presented at the meetings of the Public Choice Society in San Antonio, the European Public Choice Society in Athens, the Mont Pelerin Society in Prague, the European Economic Association in Milan, the International Institute of Public Finance in Maastricht, the German Economic Association in Graz, at seminars at the Istituto Bruno Leoni in Milan, at the Universities of Siegen and of Hagen. We thank the discussants of our paper and participants in the sessions, in particular Randy Holcombe for valuable comments and suggestions. We are also indebted to two anonymous referees and to the editor in charge of this paper, Bill Shughart, for their careful reading of an earlier version of the manuscript, and for their detailed comments. Finally, we would like to thank Heiko Burret, Ekkehard Köhler and Sarah Necker for very valuable research assistance.